The Collapse Of The Housing Crisis

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Economists cite a plethora of reasons on why the Global Financial Crisis started. However, most economists can agree that the bursting of the U.S housing bubble, irresponsibility practiced by regulators and financiers, greed of banks, lack of leadership from central banks, complex chains of debt, and the credit crunch led to what is referred to as the largest crisis since the Great Depression. The collapse of the housing bubble, which peaked in 2004, in the United States is usually cited as the initial trigger of the crisis. The beginning of the bubble was due to the readily available credit in the U.S. that was fueled by a large influx of foreign funds following the Russian debt crisis and Asian financial crisis. This led to a boom in…show more content…
Slumps in value made it difficult for banks to sell assets at almost any price or use them as collateral for short-term funding. Real estate prices also plummeted, and interest rates rose sharply from 1% to 5.35%. The devaluation of homes caused them to be worth less than their mortgage loan, giving consumers an incentive to foreclose on their mortgages. In addition, homeowners that were barely able to afford mortgage payments while interest rates were low were suddenly slapped in the face with the hike in interest rates, which also caused them to default on their mortgages. This phenomenon, dubbed the “foreclosure epidemic”, drained wealth from other consumers and weakened the financial strength of banks. Banks and investors that had borrowed and invested heavily in subprime mortgage-backed securities also incurred significant amounts of debt or losses with the burst of the housing bubble, adding to the severity with which the collapse of this credit driven bubble affected the world economy. With the collapse the housing bubble and the value of asset prices, banks began to doubt the viability of their counterparties. Without trust, which is the ultimate glue of all financial systems, banks stopped lending, which is the exact opposite of what banks are supposed to do. For example, the investment bank BNP Paribas told investors that they would be unable to take out money from some of its
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